The Company Just Told You It's Choosing to Lose Money on Operations
This is the rare quarter where a reader doesn't have to infer management's intent from the numbers - MercadoLibre said it directly in its own investor presentation: "Operating loss decreased to $12.5 million as a result of the aforementioned investment cycle we have embarked upon to scale our marketplace and payments businesses." That's a genuinely different posture than Q1 2019's operating profit (+$10.1 million) - the Company swung back into an operating loss sequentially, on purpose, deploying part of the $1,965.9 million net capital raise from PayPal, Dragoneer, and the public markets into marketing spend and IT product-development headcount, which grew more than 50% year-over-year. Sequential operating expenses rose almost 26% quarter-over-quarter - a number worth sitting with, since it means the Company is now spending materially faster than its own already-fast revenue growth, funded by cash that was sitting mostly idle a quarter ago.
The recursive read here is that MercadoLibre is trying to widen the loop it's already running - more marketing spend → more registered users (up 24.5% YoY to 292.5 million) → more transacting buyers (up 20.7% to 20.4 million) → more payment volume flowing through Mercado Pago (total payment volume +47.2% reported, +90% at constant currency) → more data to underwrite MercadoCredito loans and price MercadoPago fees - and betting that the marginal dollar of marketing spend still buys durable users rather than just pulling forward demand that would have shown up anyway. Year-over-year operating margin actually improved (-2.3% from -8.4%) even with the new spending, because gross margin expanded 2.3 percentage points on collection-fee and sales-tax leverage; the loss narrowing while spending accelerates is the tell that this is a controlled reinvestment decision, not a business losing control of its cost structure.
The Prescription
MercadoLibre should keep funding this investment cycle, but tie the marketing-spend increase explicitly to a unit-economics disclosure (customer acquisition cost by cohort, or at minimum by country) rather than a single aggregate sales-and-marketing line. Right now a reader has to take management's word that this spending is "investment" rather than "inefficiency creeping in" - the $2 billion raise gives the Company genuine room to run this experiment, but a reader six quarters from now needs a way to check whether it actually worked, and the current disclosure doesn't provide one.
What it should stop doing: letting individual subsidiaries borrow working capital in local currency at rates that are, on their face, extraordinary - the Argentine subsidiary's finance leases carried a weighted average rate of 68.5% per annum this quarter, and one new unsecured line of credit from Citibank came in at 85.00% per annum (see An 85% Interest Rate, Fully Disclosed and Fully Repaid below). These loans get repaid on schedule and the dollar amounts are immaterial next to $2.9 billion of consolidated cash, but a company holding that much liquidity centrally has no operational reason to let a subsidiary pay 85% annualized interest for short-term pesos - that's a treasury-management gap, not a rounding error waiting to happen.
Key Financial Metrics
Three months ended June 30, 2019 vs. three months ended June 30, 2018 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion needed)
| Metric | Q2 2019 | Q2 2018 | YoY |
|---|---|---|---|
| Net revenues | $545.2M | $335.4M | ✅ +62.6% reported (✅ +102% at constant currency per the Company) |
| Cost of net revenues | $(272.8)M | $(175.6)M | ⚠️ +55.4% |
| Gross profit (50.0% margin) | $272.4M | $159.7M (47.6% margin) | ✅ +70.6%, margin +2.3pp |
| Product and technology development | $(53.9)M | $(33.4)M | ⚠️ +61.3% - IT product-development headcount grew over 50% YoY |
| Sales and marketing | $(180.7)M | $(121.2)M | 🔴 +49.1% - the deliberate "investment cycle" spend |
| General and administrative | $(50.3)M | $(33.3)M | ⚠️ +50.9% |
| Loss from operations (-2.3% margin) | $(12.5)M | $(28.2)M (-8.4% margin) | ✅ Narrower loss, margin +6.1pp (sequentially worse than Q1 2019's +$10.1M profit - a deliberate reinvestment, per management's own framing) |
| Interest income and other financial gains | $33.7M | $9.9M | ✅ +240.0% - proceeds from the 2028 Notes and the 2019 capital raise |
| Interest expense and other financial losses | $(14.7)M | $(13.2)M | ⚠️ +11.2% |
| Foreign currency gains | $0.8M | $12.6M | ⚠️ Narrower gain - Brazilian real strengthened against the Company's dollar net liability position |
| Net income (loss) | $16.2M | $(11.3)M | ✅ Swung from a loss to a profit |
| Diluted EPS | $0.31 | $(0.25) | ✅ Swung positive |
| Capital expenditures | $38.4M | $23.7M | ⚠️ +62.0% |
Six months ended June 30, 2019 vs. six months ended June 30, 2018
| Metric | H1 2019 | H1 2018 | YoY |
|---|---|---|---|
| Net revenues | $1,019.0M | $656.4M | ✅ +55.3% reported |
| Loss from operations | $(2.3)M | $(57.7)M | ✅ Narrower loss |
| Net income (loss) | $28.1M | $(24.2)M | ✅ Swung from a loss to a profit |
| Net cash provided by operating activities | $165.9M | $107.2M | ✅ +54.8% |
| Net cash used in investing activities | $(1,414.9)M | $28.9M provided | ⚠️ Swung to a use of cash, almost entirely short-term investment purchases as part of parking the capital raise |
| Net cash provided by financing activities | $1,916.2M | $79.5M | ✅ Almost entirely the residual effect of Q1's capital raise plus $88.4M of new capped-call transactions |
| Cash, restricted cash and short-term investments (period end) | $2,917.7M | n/a | Essentially flat versus Q1 2019's $2,954.7M - the raise proceeds are being held, not spent down |
| Total equity | $2,145.8M | n/a | Down slightly from Q1 2019's $2,214.1M as the operating loss and currency translation offset retained-earnings growth |
Four Countries, Diverging Again
Brazil ($340.9M net revenue, +74.0% reported / +27% FX-neutral GMV growth) remains the scale engine and, unlike Q1, is now reaccelerating rather than decelerating on a local-currency GMV basis - management attributes this to easier prior-year comparisons and heavier investment behind traffic generation and conversion. A new AR$10 flat fee (mirroring the Brazilian real-equivalent policy) briefly hurt low-value-item growth in April but was offset by rising average selling prices.
Argentina ($113.9M net revenue, +13.8% reported / +63% FX-neutral GMV growth) shows the reported-vs-local-currency gap narrowing versus Q1's -8.0% reported despite +69.6% local-currency growth - the peso's devaluation pace slowed enough this quarter (a 46.5% average year-over-year devaluation, versus Q1's 53.5%) that reported revenue turned positive even as underlying commerce activity remained the fastest-growing of the four segments.
Mexico ($64.4M net revenue, +267.1% reported / +45% FX-neutral GMV growth) again posts the largest reported growth rate, still partly an artifact of the November 2018 agent-to-principal shipping accounting change flagged last quarter, but the underlying 45% local-currency GMV growth is genuinely the second-fastest of the four segments for a second consecutive quarter.
Other Countries ($26.1M net revenue, +19.2%) grew steadily, continuing the pattern from Q1.
Segment comparison: ranking by FX-neutral GMV growth this quarter - Argentina (63%) > Mexico (45%) > Brazil (27%) - is the same ordering as Q1, but Brazil's own growth rate has now accelerated (27% versus Q1's 17.9%) rather than continuing to decelerate, suggesting the Q1 slowdown flagged in the prior post was a temporary flat-fee adjustment effect rather than the start of a genuine deceleration.
Key Operational Metrics
Three months ended June 30, 2019 vs. three months ended June 30, 2018
| Metric | Q2 2019 | Q2 2018 | YoY |
|---|---|---|---|
| Gross merchandise volume (GMV) | $3,397.7M | $3,135.4M | ✅ +8.4% in USD (✅ +33% FX-neutral per the Company) |
| Number of successful items sold | 88.7M | 85.4M | ✅ +3.9% |
| Number of successful items shipped | 70.2M | 52.8M | ✅ +33.0% |
| Total payment volume (TPV) | $6,517.4M | $4,426.1M | ✅ +47.2% |
| Total volume of payments on Marketplace | $3,120.0M | $2,794.3M | ✅ +11.7% |
| Total volume of payments off Marketplace (implied) | ~$3,397.4M | ~$1,631.8M | ✅ +108.2% - now over half of TPV for the first time |
| Total payment transactions | 181.6M | 85.5M | ✅ +112.4% |
| Unique buyers | 20.4M | 16.9M | ✅ +20.7% |
| Unique sellers | 4.3M | 4.2M | ✅ +2.4% - recovered from Q1's 16.0% YoY decline, easing the concern flagged last quarter |
| Number of confirmed registered users (period end) | 292.5M | 234.9M | ✅ +24.5% |
Beyond the Usual
An 85% Interest Rate, Fully Disclosed and Fully Repaid
MercadoLibre's Argentine subsidiary took out an unsecured line of credit from Citibank, N.A. this quarter at a fixed rate of 85.00% per annum - the highest short-term borrowing rate this coverage has seen from any MercadoLibre subsidiary, up from Q1's already-high 55.50%. It was fully repaid in July 2019, and separately the subsidiary's finance leases carried a weighted average rate of 68.5% per annum. These rates reflect Argentina's genuinely extreme domestic interest-rate environment in mid-2019, not distress at MercadoLibre - but the trend (Q1's 55.5% high becoming Q2's 85.0% high) is worth tracking as a real-time read on how fast Argentine short-term credit costs are moving, independent of anything MercadoLibre itself is doing.
The Convertible Notes Are Now Worth $334 Million More Than Their Face Value
The 2028 Convertible Notes' if-converted value exceeded their $880 million principal amount by $334.2 million as of June 30, 2019 - up sharply from Q1's $127.7 million, simply because MercadoLibre's stock price rose from $507.73 to $611.77 over the quarter. The Company responded by entering a third tranche of capped-call transactions in June 2019, paying $88.4 million to raise its effective protection ceiling to a cap price of approximately $846.86 per share (versus $656.90 and $666.72 for the first two tranches) - a genuinely useful number for a reader trying to gauge how much further the stock could run before dilution protection starts running out again.
A New $54.7 Million Purchase Commitment for Point-of-Sale Hardware
MercadoLibre disclosed a new purchase commitment with a Brazilian supplier for 1,290,000 mobile point-of-sale device units, totaling $54.72 million, with partial deliveries between May and October 2019. This is a genuinely new disclosure this quarter (not carried over from an earlier filing) and gives a concrete read on how aggressively the Company is scaling its physical MPOS distribution in Brazil ahead of demand, rather than reacting to it.
The 2019 Convertible Notes Matured Just After Quarter-End
MercadoLibre's original 2019 Notes (issued 2014, $330 million principal, partially repurchased in 2018) matured on July 1, 2019 - the day after this quarter closed. Holders of $66.0 million in remaining principal elected to convert into 523,407 shares of common stock; the remaining $17 thousand was repaid in cash. This closes out the Company's oldest outstanding convertible debt instrument cleanly, with almost the entire remaining balance converting to equity rather than requiring a cash repayment.
Legal Exposure Ticked Up Slightly From Last Quarter
Accrued probable legal liabilities rose to $5.32 million (from Q1's $4.78 million), while the separately-disclosed "reasonably possible" exposure eased slightly to $11.25 million (from $12.56 million). Both figures moved in opposite directions by small amounts - not itself a finding, but consistent with routine ordinary-course litigation churn rather than any new material matter.
Target Valuation Range
No numeric fair-value range yet, the same gap as Q1: a Company-disclosed unlevered free-cash-flow bridge still isn't available in the GAAP statements, so a real DCF can't be anchored this quarter either. On the operating-cash-flow-yield sanity check below, verdict is still fairly valued to slightly overvalued, with the case for "overvalued" weaker than last quarter. The stock rose a further 20.5% during the quarter (to $611.77 from $507.73) while the underlying business also genuinely reaccelerated (constant-currency revenue growth hit 102%, from Q1's already-fast 93%) and net income turned positive for a second consecutive quarter - the fundamentals are catching up to the price faster than Q1's valuation section anticipated, even though the price itself kept climbing.
A full DCF still requires more consistent Company-disclosed free cash flow reporting than is available in the GAAP statements filed to date; the sanity check below uses the same operating-cash-flow-yield approach as last quarter, applied to the trailing six months.
| OCF-yield sanity check | Q1 2019 | Q2 2019 (H1 annualized) |
|---|---|---|
| Share price (period-end) | $507.73 | $611.77 |
| Shares outstanding | 49.3 million | 49.3 million |
| Market capitalization | ~$25.0 billion | ~$30.2 billion |
| Annualized operating cash flow (est.) | $450-550 million | $330-380 million |
| Implied operating-cash-flow yield | <2.2% | 1.1-1.3% |
The yield is tighter than Q1's already-thin sub-2.5% reading, meaning the market is pricing in even more sustained hypergrowth than it was three months ago.
| Scenario | Key driver | Implied outcome |
|---|---|---|
| Current (Q2 2019 close) | actual market price | ~$30.2 billion market cap, 1.1-1.3% OCF yield |
| Bull | The deliberate marketing/headcount investment cycle disclosed this quarter converts into durable user and transaction growth (rather than one-time demand pull-forward), consistent with the bull case outlined last quarter | current multiple could still look reasonable in 2-3 years |
| Bear | The investment cycle doesn't produce durable growth - this quarter's 26% sequential opex increase turns out to be pure cost inflation rather than productive reinvestment | operating losses could persist or widen without a corresponding acceleration in the metrics that justify the current valuation, compressing the multiple meaningfully from here |
No directly comparable, similarly-scaled Latin American e-commerce/fintech peer was yet public as of this filing for a clean multiples cross-check - the same gap noted in Q1's valuation section.
No directly comparable, similarly-scaled Latin American e-commerce/fintech peer was yet public as of this filing for a clean multiples cross-check - the same gap noted in Q1's valuation section.